Investing: Stock buybacks get a backlash

Rubio: Buyback foe(Newscom, AP)

Sen. Marco Rubio (R.-Fla.) last week called for an end to the favored tax treatment of share buybacks, said Matt Egan in CNN.com. Buybacks, a maneuver in which a company pays out money to investors by purchasing its own stock, have largely replaced dividends as corporate America’s favorite way of distributing profits. They give investors a lower capital gains tax rate—unlike dividends, which are taxed as ordinary income. In 2018, U.S. companies announced more than $1 trillion in buybacks, an increase of 71 percent. In taking arms against the practice, Rubio joins Democrats who “have slammed the spike in share repurchases sparked by the 2017 tax law.”

Removing the incentives to repurchase shares “would be wise,” said Bloomberg News in an editorial. “Companies are using big portions of their savings from the tax overhaul” on buybacks instead of undertaking profitable investments. This is troubling. Research shows that companies that increase their share repurchases become “less likely to prosper.” And when firms finance their buybacks by borrowing, “the risk of disappointing results is all the greater.” While some of the resentment over repurchases is overdone, the tax code distorts managers’ decisions. “The rules should be changed to put dividends and buybacks on a level footing.” ■